Your agent takes you to that picture-perfect home that includes everything on your must-have list. It’s the one; you’re ready to pounce and make an offer, and your agent’s coming at you with next steps — sales contract, contingency options, the appraisal. There are lots of moving parts, and your agent’s primary job is to protect your interests. A big part of that is making sure you’re not overpaying for your home.
That’s where the appraisal comes in, and it’s often a sticking point in a home sale transaction. An appraisal that differs from a home’s purchase price can throw a monkey wrench in the deal and can even stop it in its tracks — appraisal hiccups account for 12% of all cancelled real estate contracts.
You hear a lot about the challenges buyers may face when an appraisal comes back low. But what’s at stake when it comes back higher than your home’s sale price? What happens next might surprise you; we talked to top-selling agent Amy Haggstrom in Omaha, Nebraska, and certified appraiser Ryan Lundquist in Sacramento, California, to shed some light on the home appraisal process and how buyers could benefit from high appraisals.
In most real estate transactions requiring a mortgage, an appraisal is ordered by the lender. Buyers are expected to assume the cost ($300 to $450 is the national average), which is typically included in the closing costs.
For a lender, the main purpose of the appraisal is to prevent them from lending more money than the home is worth. By extension, it also protects you as the buyer for the same reason. It makes you better informed so you’re not overpaying for a home.
An appraisal takes several factors into account when determining a home’s value. Exterior features include neighborhood, street, and comps, which are recently sold homes in the immediate area that are comparable to the house the appraiser is evaluating. For example, if two similar houses in the community recently sold, one for $450,000 and the other $485,000, the appraiser will take both into consideration when appraising your property.
The home itself will also receive a thorough review, and features like square footage, bed and bath counts, floor plan, and condition are also considered. The appraiser will also factor in market conditions, and if your agent provided supplemental information about the property, they’ll review that, too.
Because the appraisal is ordered by the lender, you might not know exactly when it’s taking place (most buyers aren’t present at the appraisal). The timing of the appraisal can vary regionally, but Haggstrom notes it can be a couple of weeks into the loan process.
The appraiser will “visit the property on location, walk through the property, take their notes, photos, all of that — and then, usually a week to week and a half after that visit, they will submit the written report to the bank.”
The seller typically does not receive a copy of the appraisal unless they specifically request one, which we’ll discuss in more detail in a bit.
The appraiser’s role
An appraisal is performed by a licensed real property appraiser. They bring to the transaction neutrality, knowledge of the area, and an understanding of construction quality.
Their job is not to confirm the purchase price of a home. Rather, their primary function is to “produce a credible opinion of value which reflects the current market,” according to The Appraisal Foundation, an association of appraisal professionals that sets standards and certifications for the industry.
During a home appraisal, the appraiser will walk the property’s exterior and interior to check out the home’s lot size, structural age, condition, floor plan, any recent improvements, and repairs. If there’s a pool, spa, shed, or other amenities on the property, they’ll take a look at those, too.
Appraisers will also review the neighborhood and note any distinguishing features, like school quality, traffic patterns, proximity to power lines, and the home’s location relative to various amenities.
Lundquist explains that there are some streets that are more valuable than others, even in the same neighborhood. “There’s pockets of higher value and there’s pockets of lower value — or there’s a street that faces a park, something extra that people are willing to pay more for.”
Appraisal amount versus loan amount
The appraisal is one of the first steps that happens during the escrow or settlement process, as the report could significantly affect the transaction.
When an appraiser assesses your property, they’re providing a professional, educated guess on its value. This amount is separate from the amount of money you’re borrowing from a lender, although one can affect the other. A lender won’t approve a home loan for more money than an appraiser says the house is worth.
What happens when the appraisal is higher than the home purchase price?
If the appraisal amount comes in higher than what you’re paying for the home, it’s time to break out the bubbly. Congrats — you’re paying less than the home’s value and getting a deal!
Lenders will review the appraisal amount and home purchase price, then agree to loan the lower of the two amounts when reviewing a loan application. So say your offer to buy a house for $200,000 was accepted; you’re making a $20,000 down payment and you need the lender to agree to loan you the remaining $180,000. If the appraisal comes back at $220,000, your loan amount of $180,000 won’t be threatened because it’s lower than the appraisal.
Good news, right? What’s more, in a high appraisal situation, you’ll benefit from an immediate bump in your home’s equity. “That gap is basically instant equity for that buyer,” Haggstroms says.
If you’re putting down less than 20%, with many loans, it could also get your loan-to-value ratio under 80% faster to eliminate mortgage insurance (MI) and reduce your monthly mortgage payment.
You’ll also be able to qualify for a home equity loan faster, which can be helpful if you’re planning home upgrades or other big-ticket expenses and need extra cash.
Finally, this equity boost will only help you down the road if or when you plan to sell the home — you’ll be in a good position to profit more from the transaction.
Can the seller back out of a high appraisal sale?
Can the seller back out if your appraisal is high? Realistically, the answer is “no.” For one, they accepted your offer and would be breaching the sales contract if they wanted to put the house back on the market to capture a higher price. “They really don’t have any recourse after that because we have a signed purchase agreement for that price,” says Haggstrom.
However, the seller can accept a higher offer as a backup offer, and if anything happens to disrupt your sale, the other buyer would win the house.
The seller could also ask for a provision in the sales contract that, in the event a higher backup offer is presented, you as the original buyer will have the opportunity to match or exceed that backup offer. If that exception has been written into the contract and you can’t (or don’t want to) meet the backup offer price, then the seller could back out of the contract.
And that’s the other caveat: A seller would need a higher offer to be presented before they could take these steps to back out of yours. A high appraisal alone doesn’t give the seller the right to renege on their promise to sell the house to you; there needs to be competition for the home, and that competition must meet previously-agreed-upon parameters.
What to do if the appraisal comes in low
We’ve talked about the good news, so now it’s time to talk about what happens if the opposite occurs. If your appraisal report comes back and the amount is lower than the home’s purchase price, you’ll have some decisions to make.
Remember, lenders will loan you either the loan amount or the appraisal amount, whichever is lower. So you’ll need to address this difference, also called an appraisal gap.
Taking the $200,000 purchase price example above, if the appraisal values the home at $180,000, then suddenly you will either need $20,000 extra to cover that appraisal gap — or, you’ll have to ask the seller to lower the purchase price of the home so that you can move forward with the deal.
Here are a few options to consider if the appraisal comes in low.
Get the seller involved
Your agent may share the appraisal report with the seller and try to negotiate a reduction of the purchase price to the appraised amount.
If the seller won’t agree to those terms, you can offer to split the difference between the sale price and appraisal amount.
“The buyer can bring some additional cash to closing and maybe the seller will come down a little bit, and they’ll kind of meet in the middle and make everybody happy,” says Haggstrom.
So, for our $200,000 house that’s appraised at $180,000, you could offer to add another $10,000 to the deal if the seller reduced the sale price by an additional $10,000 to cover that gap.
Request a review or second appraisal
Unless there’s a compelling reason, there’s a good chance the first appraiser won’t change their report. You and your agent can file a Reconsideration of Value with the lender to dispute the appraisal, but you’ll need to back it up with hard data, like comparable home sales the appraiser didn’t include in their valuation (and really should have).
Lundquist doesn’t mind changing his opinion of value, “if there’s something that’s truly relevant that I miss. Nobody’s perfect, algorithms aren’t perfect, Google is not perfect.”
He does, however, prefer that this type of information’s shared before the appraisal appointment. “I want all the information upfront, I don’t want any sort of surprise data grenades.”
If you and your agent think the appraisal is too low, you may request a second opinion. You can ask for another appraisal; however, understand that you may be out of luck if the second appraisal comes in even lower than the first.
Find another lender
Another option is to give another lender a try to see if the appraiser they hire has a different opinion from the first. You’ll have to pay for another appraisal fee, and it could delay closing or settlement.
In fact, appraisal issues account for 23% of all real estate contract delays. This is not surprising, especially in a tight market where home valuations aren’t keeping pace with the rate home prices increase.
Review your appraisal contingency
An appraisal contingency is a type of contract condition that allows you to back out of the deal if the appraisal comes in low. This is where having an experienced agent who knows your neighborhood is a real benefit, as they can help draft an offer with contingencies that’s still strong and competitive.
Your agent will submit the contingency with your offer (which the seller may accept, reject, or counter); it can even specifically state what you’ll agree to pay should the appraisal come in low.
Appraisal contingencies can be a tougher sell in a competitive market, but they offer peace of mind to buyers. It also gives you a way out of the deal should the appraisal come in low (and truthfully, if you’re getting a mortgage loan to buy your house, you will likely not be able to exclude the appraisal contingency without bringing extra funds to the table).
While you’ll cut your losses on the appraisal and inspection fees, you’ll get your earnest money back, as long as that’s included in the contingency.
The appraisal is a critical step in the home sale process. A lot hinges on the outcome, and a qualified agent can help you decide what to do if your home’s appraisal differs from the sale price.
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